Rupee, bonds may swing to global tunes

Overseas investors are expected to increase their purchases of Indian assets after the ruling combine’s return to power with a bigger majority, yet mounting concerns over trade barriers will likely cap the rupee’s rise in a year that may witness modest growth globally. Bond yields could also soften.

The rupee is expected to trade in a wide range of 66-75 to a dollar till December end, showed an ET survey that polled 24 market participants. The local unit could either strengthen up to 5 per cent or lose more than 7 per cent if global growth shrinks in the aftermath of tariff wars involving the world’s two biggest economies.

“Sentiments are more a function of global factors (trade tensions, oil prices or global growth) than domestic issues,” said Anubhuti Sahay, head of South Asia Economic Research (India), StanChart.

“We believe that completion of already initiated policy changes should be prioritised before the second round of major policy changes is initiated.”

Similarly, the benchmark yield is likely to fall up to 63 basis points this calendar year from the current level of 7.23 per cent on expectations of up to half a percentage point cut in a key rate by the central bank, showed the survey. A basis point is 0.01 percentage point.

The rupee has gained 0.35 per cent against the dollar this year. Since the publication of exit polls a week ago, the Indian currency has risen more than 1 per cent, ranking second on the leader board of advancing currencies from emerging markets.

Policy continuity is crucial for the stability of India’s debt and currency markets, which are interlinked. Growth has been uneven in the world’s fastest-expanding major economy of late. In FY19, GDP growth slipped to a five-year low of 6.6 per cent in the December quarter. It is expected to be 7 per cent in FY19 from 7.2 per cent a year earlier.

To be sure, likely rate reductions in the US should drive fund flows into India even though growth has remained at the lower end of forecasts.

“There will be reallocation of offshore funds into emerging markets, including India,” said Abheek Barua, chief economist,HDFC Bank. “The possibility of a US rate cut should go up, triggering a shift in fund allocations between the developed and emerging market economies.”

Traditionally, India has been running a fiscal deficit, which touched 4.52 per cent of GDP in February, compared with 3.4 per cent targeted for the whole of FY19.

“There is a need to set up an independent fiscal commission,” said Gaurav Kapur, chief economist at IndusInd Bank. “Markets expect a viable fiscal consolidation trajectory from the government. Besides, infrastructure development should be the prime objective, which in turn will push up growth.”

“A uniform cut in GST (goods and services tax) rates could result in more collections as the move would encourage companies to be more compliant,” said Aditya Birla Mutual Fund CEO A Balasubramanian. “That would be a key positive for wooing overseas investments, with an improving fiscal condition.”

In fact, segment leaders like Maruti Suzuki, Tata Motors and Hero MotoCorp have reported de-growth of 34.3 per cent, 45 per cent and 20 per cent, respectively giving a clear indication of a prolonged slowdown in the sector.